The company that fired its CFO last week over his social-media postings may not have let itself off the hook by doing so. Despite the company’s claim that it was unaware of the finance chief’s activities until May 11, it still may face a Securities and Exchange Commission enforcement action.
On at least one occasion, Gene Morphis, the former CFO of Francesca’s Collections, revealed confidential company information via his Twitter account (@TheOldCFO). The profile on the account, which apparently was deactivated sometime after May 17, did not mention Morphis’s name, but it provided links to his personal Facebook page and his personal blog, Morph’s View. His LinkedIn profile was linked to the Twitter feed as well.
On March 7, six days before Francesca’s, an apparel company, filed its annual report with the SEC, Morphis tweeted, “Board meeting. Good numbers=Happy Board.” That was a likely violation of the SEC’s Regulation FD because the message contained material, nonpublic information about the company and was directed to a selective audience (Morphis’s Twitter followers), says David Cifrino, a securities attorney with McDermott Will & Emery.
“The information he tweeted was on its face market-moving information,” Cifrino says. “It clearly could have indicated that the company’s results were going to be positive, maybe more than had been anticipated.” And indeed, investors may have taken notice, as the company’s stock climbed 15% over the next six days leading up to its earnings announcement.
The ex-CFO often communicated nonpublic information about the company that portrayed him as a colorful character but may not have been material. For example, on March 14, the day after the SEC filing, Morphis posted this on Facebook: “Earnings released. How do you like me know [sic], Mr. Shorty,” an apparent reference to defeated short sellers.
After a two-day investigation, Francesca’s fired Morphis on May 13. In a news release, the company did not say what specific communications earned Morphis his walking papers, instead merely noting that he had “improperly communicated company information through social media.”
Morphis, 63, is clearly vulnerable personally to an SEC enforcement action — and so is Francesca’s, even accepting the company’s contention that it didn’t know of his social-media activities, and despite its move to fire him when it found out.
“To the extent the company can show it had policies prohibiting that sort of behavior, the SEC might take that into consideration,” says Cifrino. “But ultimately, a company is responsible for the behavior of its officials, and anyone it entrusts as CFO ought to know that tweeting material nonpublic information would be a problem.”
Did Morphis, with his extensive corporate-finance experience, really not know that the March 7 tweet was a likely violation of Regulation FD? Did he just not care? He’s not saying. He did not respond by press time to a message left on his home telephone. Francesca’s, meanwhile, declined to comment.
There is also no evidence that Morphis had a financial motivation for his actions, though he did sell almost a third (or 7,000) of his Francesca shares on April 23. The transaction was at $27.60 per share, or 18% more than the shares had been worth at the close of trading on March 7, the day of his “happy board” tweet. He had not sold any company stock during the previous year.
The moral of the story for publicly held companies, says Cifrino, is that they need to make sure they are up to date with how top executives are using social-media platforms. SEC allegations of Regulation FD violations typically result in monetary settlements with the company or individual executives that range from $50,000 to $500,000. More important, such cases “often create significant reputational damage to the company for having consented to a judgment, even if it does not admit culpability,” notes Cifrino.
For top executives, the moral is to be careful about what they tweet and post. But that is just part of the overall imperative for senior executives of public companies to hold confidential company information closely at all times. It’s not the medium that’s to blame; it’s the message.